The Merits of Innovation Prizes

Innovation prizes also help form new alliances. Netflix, an American company that rents films, offered a $1m prize to anyone that could do a better job than its own experts in improving the algorithms it uses in online recommendations. It was stunned to receive entries from over 55,000 people in 186 countries. The seven members of the winning team, who collaborated online, met physically for the first time when they picked up the prize in 2009.

Inspired by such successes, governments are now offering prizes. Britain, Canada, Italy, Russia and Norway, in co-operation with the Gates Foundation, are funding the Advanced Market Commitment (AMC) to develop vaccines for neglected diseases in the developing world. The AMC is offering $1.5 billion to drugs firms that can deliver low-priced vaccines for pneumococcal disease, a big killer of children. GlaxoSmithKline plans to deliver such vaccines to Africa next year.

Alpheus Bingham, a co-founder of InnoCentive, says government agencies, ranging from America’s space agency, NASA, to the city of Chicago, now use his company’s platform to offer prizes. There is even a bill in the American Congress that would grant every federal agency the authority to issue prizes.

Is this a good thing? Prizes used to promote a policy are vulnerable to political jiggery pokery, argues Lee Davis of the Copenhagen Business School. Thomas Kalil, a science adviser to Barack Obama, acknowledges the pitfalls but insists that incentive prizes offered by governments can work if well crafted. Indeed, he argues that the very process of thinking critically about a prize’s objectives sharpens up the bureaucracy’s approach to big problems.

One success was NASA’s Lunar Lander prize, which was more cost-effective than the traditional procurement process, says Robert Braun, NASA’s chief technologist. Another example is the agency’s recent prize for the design of a new astronaut’s glove: the winner was not an aerospace firm but an unemployed engineer who has gone on to form a new company.

When the objective is a technological breakthrough, clearly-defined prizes should work well. But there may be limits. Tachi Yamada of the Gates Foundation is a big believer in giving incentive prizes, but gives warning that it can take 15 years or more to bring a new drug to market, and that even AMC’s carrot of $1.5 billion for new vaccines may not be a big enough incentive. No prize could match the $20 billion or so a new blockbuster drug can earn in its lifetime. So, in some cases, says Dr Yamada, “market success is the real prize.”

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